United States: Financial Industry Week In Review - September 23, 2013

Financial Industry Developments

FHFA's New Quarterly Report on Fannie, Freddie and Federal Home Loan Banks Financial Performance

On September 19, FHFA launched a new FHFA Quarterly Performance Report of the Housing GSEswhich provides a summary of data available in Fannie, Freddie and the FHLBanks' public filings, including certain combined trends.  The first issue covers the second quarter of 2013 and includes such factors as house prices, average interest rates and swap rates.  The report also includes a quarterly update on the conservatorships of Fannie and FreddieReleaseReport.   

JPMorgan Chase to Pay Penalties for Oversight Deficiencies

On September 19, JPMorgan Chase entered into a consent Order of Assessment of a Civil Money Penalty with the Fed, the OCC, the SEC and the Financial Conduct Authority of the United Kingdom.  The penalties issued by the agencies total approximately $920 million.  The fine resulted from the deficiencies identified by the regulators in JPMorgan Chase's risk management oversight, model validation, internal financial reporting and internal audit, and failure to elevate certain issues to the attention of the board of directors.  In a separate action, the OCC and CFPB ordered JPMorgan Chase to refund $309 million for illegal credit card practices and to pay $80 million in civil penalties.  Fed ReleaseCFPB ReleaseFed Consent OrderOCC Consent Order

SEC Approves Registration Rules for Municipal Advisors

On September 18, the SEC unanimously adopted permanent registration rules for municipal advisors as required by the Dodd-Frank Act.  The new rule requires an advisor to permanently register with the SEC if it provides advice to state and local governments on the issuance of municipal securities, about certain "investment strategies," or on municipal derivatives.  The new rules will supersede current temporary registration rules and will become effective 60 days after they are published in the Federal Register.  Press Release

SECProposes Rules for Pay Ratio Disclosure

On September 18, the SEC voted 3-2 to propose a new rule requiring public companies to disclose the compensation ratio of CEO to the median compensation of its employees, as required by the Dodd-Frank Act.  Under the proposal, companies would have the flexibility to determine the median annual total compensation of its employees in a way that best suits their circumstances.  The proposal will be subject to a 60-day public comment period once it is published in the Federal Register.  Press ReleaseProposal.

Rating Agency Developments

On September 17, DBRS published a criteria for rating Canadian derivativesCriteria.

On September 17, DBRS published a criteria for rating Canadian ABCPCriteria.

On September 16, DBRS published a criteria for assessing legal considerations for rating Canadian Structured FinanceCriteria.

On September 12, Fitch published an updated criteria for rating Aircraft Enhanced Equipment Trust CertificatesCriteria.

Note: Free registration is required for rating agency releases and reports.

Distressed Debt and Restructuring Developments

CourtFinds ACA Financial Guaranty Must Back Pre-Bankruptcy Bonds

Earlier this month, Judge Judith J. Gische of the Appellate Division of the Supreme Court of New York, First Judicial Department found that ACA Financial Guaranty Corporation, as bond insurer, must make future, post-confirmation principal and interest payments on bonds issued pre-bankruptcy by a municipal issuer despite the fact that the bonds were exchanged for new bonds and cancelled under the municipality's chapter 9 plan.  The Court required ACA to make these payments because "neither the plan of debt adjustment nor the discharge of the bond debt in the bankruptcy proceeding changed the obligations under the parties' contracts of insurance."  The insurance policies at issue were governed by New York law.  This decision makes clear that monoline insurers must continue to extend coverage to bondholders after a municipal issuer files for chapter 9 and obtains a discharge of the bond debt in bankruptcy.  See Oppenheimer Amt-Free Municipals v. ACA Fin. Guar. Corp., 2013 N.Y. App. Div. LEXIS 5688 (N.Y. App. Div. 1st Dep't Sept. 3, 2013).

RMBS and Other Securities Litigation

ThirdCircuit Affirms Dismissal of Securities Class Action Against UBS

On September 17, the U.S. Court of Appeals for the Third Circuit affirmed the dismissal, as time-barred, of a class action brought by RMBS certificateholders against UBS over losses related to the RMBS.  Filing suit in February 2010, the Plaintiffs alleged that UBS made misrepresentations in the RMBS offering documents concerning the mortgage loan originators' compliance with their underwriting guidelines, the appraisal practices used in appraising the underlying properties and the loan-to-value ratios of the mortgage loans.  Plaintiffs asserted claims under Sections 11, 12(a)(2) and 15 of the Securities Act.  The Third Circuit held that Plaintiffs' claims were time barred by the one-year statute of limitations provided by Section 13 of the Securities Act.  Under the "discovery rule," which the court held applies to Section 13, the statute begins to run on the date that a plaintiff did in fact discover, or reasonably should have discovered, the facts constituting the alleged violation.  The court concluded that a reasonably diligent plaintiff would have begun investigating claims in connection with its certificates by September 2008, when a class of plaintiffs, including the lead plaintiff here, filed a separate suit against UBS (among others) making allegations similar to those in this case.  The court further concluded that a reasonably diligent investigation conducted at that time would have led to knowledge of the claims asserted more than one year before the lawsuit was filed.  Decision

Deutsche Bank Files $666 Million Suit Against GE Capital

On September 13, Deutsche Bank, acting in its capacity as Trustee of the Morgan Stanley ABS Capital I Inc. Trust, Series 2007-HE6 (the Trust), filed a lawsuit in the United States District Court for the District of Connecticut against General Electric Capital Corp. and its subsidiary, WMC Mortgage L.L.C.  Plaintiff alleges that WMC breached representations and warranties concerning 3,399 mortgage loans securitized into the Trust.  Plaintiff also alleges that WMC breached certain repurchase, notification and indemnification obligations.  Plaintiff seeks specific performance of the alleged repurchase obligations or damages totaling at least $500 million.  Complaint.

European Financial Industry Developments

Responsesto ESMA Consultation Paper on EMIR Clearing Obligation

On September 17, the European Securities and Markets Authority (ESMA) published responses to its July 2013 consultation paper on draft regulatory technical standards (RTS) on contracts having a direct, substantial and foreseeable effect within the EU and on the non-evasion of provisions of EMIR (Regulation 648/2012).  ResponsesConsultation Paper.  

FCAChief Executive Speaks at ISDA Conference on Reform of the International Derivatives Market

The FCA has published a speech made at a conference held by ISDA in London by the Chief Executive of the FCA, Martin Wheatley, on reform of the international derivatives market.

The speech focused on the "final delivery stage" of reforms in this area.  Martin Wheatley commented that the details on which regulators are currently focusing "happen to be some of the most important facing the derivatives industry."

The key issues under consideration were the extent to which financial regulators exert influence across international markets, the issue of the broader recognition of equivalence between international regimes, the collateralization of bilateral derivatives, EMIR implementation and benchmarking.  Speech.  

EuropeanCommission Proposes Regulation on Benchmarks

On September 18, the European Commission published a proposed Regulation on indices used as benchmarks in financial instruments and financial contracts, together with a number of related documents, including an impact assessment and a set of frequently asked questions.

The aim of the proposed Regulation is to ensure the integrity of and restore confidence in benchmarks.  In broad terms, the Commission intends to achieve this by ensuring that benchmarks are not subject to conflicts of interest, are used appropriately and reflect the actual market or economic reality they are intended to measure.

The proposed Regulation will now pass to the European Parliament and the Council of the EU for consideration under the ordinary legislative procedure.  Proposed Regulation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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